"How to avoid another Lehman nightmare
By Andrew Hill and Charis Gresser
Published: May 11 2009 20:15 | Last updated: May 11 2009 20:15
The UK Treasury’s “initial thinking” about how to avoid a re-run of the Lehman Brothers catastrophe should be prescribed bedtime reading for incurable insomniacs. But its ideas about reforming insolvency procedure for investment banks are an important first step towards banishing the Lehman nightmare.
It’s tempting to blame delays in the return of Lehman client assets and settling of trades on the UK regime. The US seemed to move faster. But that overlooks a crucial point: Lehman clients and counter-parties in the US benefited from precious extra days for an orderly winding down. The collapse of Lehman’s European business was more hair-raising. Administrators had to scrabble around for basic information, not to mention cash to pay staff.
But even if the basic legal framework doesn’t need an overhaul, a lot must change. Should any government again decide to let an investment bank go under, pressure on the financial system must be reduced. Some of the Treasury’s ideas are in the motherhood and apple pie category, including the need for better record-keeping and reporting of what assets are held, where, and subject to which liens. It would also be desirable if clients knew precisely what they had ceded to banks (such as the right to use assets posted as collateral). Other possible reforms are more complex: amending liability arrangements for insolvency practitioners, speeding up the return of client assets and establishing default rules for financial transactions not usually covered by such regulations.
The most important suggestion, however, focuses on the stage before insolvency. The administrators from PwC could have been spared the horror of that fateful weekend in September if they had had details of Lehman’s information technology, custodians, trading systems and employees. It sounds like mundane paperwork. But you wouldn’t want to try unscrambling another Lehman-sized mess without it.
Centrica flies a small flag
A few patriotic investors would have preferred an all-British solution to nuclear power production in the UK. But the government never seemed to have much stomach for Centrica buying British Energy outright. Instead, it committed its stake in British Energy to a bid from EDF of France last year, when oil prices were near their peak. As the commodities market tumbled, that seemed to leave Centrica tied to a minority stake in the nuclear group at an increasingly unfavourable price.
But patriots can bring out the Union flags again. Centrica has haggled its way to a usable compromise. It will own 20 per cent of the holding company for British Energy and take 20 per cent of the nuclear company’s available production. EDF also throws in a further 18TWh of power for five years from 2011. That offer doesn’t last as long as a larger chunk of British Energy’s production would have, and it won’t be immune to price fluctuations, but it will help underpin Centrica’s effort to cut its dependency on wholesale markets.
What’s more, by using its shareholding in a Belgian electricity company in part settlement of EDF’s bill for the stake in British Energy, Centrica uses up only £1.1bn of the cash it presciently raised with an early rights issue last year. It may find itself at the toddlers’ table at British Energy board meetings, while les grands garçons from EDF talk nuclear strategy, but even there it will have two seats out of 10, just as the original memorandum envisaged.
Attention must now turn to what Centrica does with the financial flexibility it has won. Its obvious target is Venture Production, the North Sea oil and gas producer where it already owns a 23.6 per cent stake, but there are plenty of other areas, such as gas storage, where Centrica could now invest with more financial freedom. As Sam Laidlaw, Centrica’s chief executive, has shown, energy is now a buyer’s market.
Dive in, the water’s lovely
“Sell in May and go away” usually applies to investors, not issuers. Yet May is again a month when companies are selling and institutions sucking it up. Last May, they were considering issues from Royal Bank of Scotland, HBOS, and Bradford & Bingley (where are they now, I wonder?). This year, Lonmin, Travis Perkins and 3i are diving in and others are said to be testing the water for capital raising. How chilly is the plunge? Fees are higher (although sub-underwriting institutions claim to be getting less of the increase than the banks), discounts are steeper – technically irrelevant, unless you’re an unenthusiastic investor wanting to sit a rights issue out.
But amid the usual grumbling about fees and discounts, a quiet tone of celebration is emerging. Equity capital markets are doing their job. And to think they said the rights issue was doomed . . .
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